CHAPTER V.

MODERN INFLUENCES UPON THE MARKETS.

Unless a speculator, whether in the Stock markets or any other market, is prepared to lay down all the elaborate machinery, without which, in these times, it is utterly hopeless to attempt to achieve favourable results in any degree, he must inevitably in the long run lose his money.[31]

[Sidenote: A FIXED LINE OF ACTION.]

The times are very much changed since the head of a great financial establishment, long since gone to his rest, set sail from the shores of France as soon as he was well assured that Wellington was over-powering the legions of Napoleon in 1815, hastened to London, and bought up all the Consols he could lay his hands on, and thereby realised a considerable fortune for himself and his heirs at one _coup_. Here is a memorable case in point as illustrating the necessity of laying down a systematic plan of operations and by sheer hard work, and at the risk of life and limb, carrying it out to a successful issue. The ordinary speculator is not to be found with these qualities of dogged perseverance in elaborating a plan of operations, and keeping to strict principles of action from the outset, never allowing his mind to be diverted from his system except under certain special circumstances, for which a margin has been allowed. The electric wire has changed matters very materially in this respect. There is more ease in these times as regards individual locomotion for the operator who has keenly to watch the fluctuations in all markets; he has silent, but at the same time gigantic forces, at his disposal, which he can exercise in pretty nearly any quarter of the globe where there is need for them; but it cuts both ways—he can make a fortune in an hour, or less time, and lose it with the same rapidity, beyond hope of recall should the second line of judgment condemn the action of the first.

[Sidenote: CLOSER UNIFORMITY OF VALUES IN ALL MARKETS THROUGH THE DEVELOPMENT OF THE TELEGRAPH SYSTEM.]

[Sidenote: A SPECULATOR CANNOT HOPE TO SUCCEED IN ANY DEGREE UNLESS HIS ARRANGEMENTS ARE AS COMPLETE AS THOSE OF A MAN ENGAGED IN BONA FIDE BUSINESS.]

All the markets of the world are regulated to a greater nicety as regards value since the more complete development of railroads and of the telegraph system. Each great article of commerce has its head quarters in its respective country, and value from that point is regulated at all the minor stations where it is dealt in, to use a metaphor, in the same way that the right time is flashed through the electric wire to the principal clocks in England at one o’clock from the Observatory at Greenwich. It is the custom consequently for all the leading merchants and dealers to be supplied by telegram with the prices current of those articles dealt in in all other markets, in which they are mainly interested. To compete with those who make a steady profit by buying and selling in obedience to _bona fide_ orders, a speculator must at least have his arrangements on a par with the non-speculator, if even then he can expect to hold his own without a still more elaborate and costly system of obtaining information, as his necessary profits can in most cases only be secured by his being in a position to anticipate a coming change.

[Sidenote: THE DIMINUTION OF GLUTS IN ALL MARKETS.]

[Sidenote: MODERN CONDITIONS RENDER IT MORE DIFFICULT THAN FORMERLY FOR SMALL MERCANTILE HOUSES TO SUCCEED.]

Whatever be the operations of speculators who employ little or no capital of their own, or the nature of the transactions of those who risk what they have belonging to them by consigning goods of various descriptions to distant markets in the future, there can never be the same gluts that have characterized the trading of former times. It would, indeed, seem that the commerce of the world must by degrees be carried on more and more by a smaller number of powerful merchants, relatively to the increase of populations and the growth of commerce, and less and less by a greater number of small weak houses. The nature of the system which is growing up under the new order of things will preclude from serious competition any but those who can afford from the commencement to start upon somewhat the same principles of action as those who already carry on and regulate the trade of the world. What chance, for instance, can a man have who starts in the Manchester goods trade, with a view to shipments to the great foreign and colonial markets, unless he can be in a position, by means of his telegraphic information from all the necessary quarters, not only to avoid sending from Manchester, goods to any particular quarter where the market is unfavourable, but also to divert a shipment already on the passage from its intended destination to some other point where, in the meantime, prices have risen?

As the system by which the interchange of commodities is effected becomes more and more perfected, and as the division of labour settles itself down into a well-defined science by the good and skilful workmen concentrating their efforts, and by the bad and unfit labourers being forced to abandon what they are unsuited for, so will the demand for all the great luxuries and necessities of life be supplied more completely on the joint stock principle. We see this in all directions growing up under our eyes. Wherever a large demand exists for any service, such, for instance, as transport, or for any article of use or consumption, there will the means of supplying both be organized. We have seen it in armies, in fleets, and in the government of countries for centuries; and we have been watching it for forty years in, perhaps, the most astonishing instance there is, viz., in railways. Formerly everybody drove in his own coach about the country, now nobody does. We have seen it for years past in banking, which, from the nature of the business, would be the most easily reformed upon the joint stock principle. It has also been working and making inroads upon commercial houses with a force which in the end will be irresistible, and which from year to year makes it more difficult for small firms with small capitals, to hold their own against the larger organisations, just as it is out of the question for any private person now to start a bank.

[Sidenote: EVERY COMMERCIAL REVULSION DESTROYS HOUSES OF A SPECULATIVE CHARACTER, AND THROWS THE GOOD BUSINESS INTO THE HANDS OF THE LARGE, SOUND ESTABLISHMENTS.]

The incalculable mischief that is caused in commercial affairs at certain periods, arises for the most part from the operations of comparatively small houses, which have insufficient capital to enable them to lay down the necessary machinery for duly informing themselves upon all the needful points about which they should be accurately posted with untiring continuity. In a great commercial city a thoroughly experienced banker or money-lender can say very nearly by heart the names of the merchant houses who are known to be beyond all question good for any amount for which they may write their signature. Starting from this nucleus, circles may be drawn defining the various degrees of credit which may be allowed to commercial houses, until a supposed outermost and largest ring of all is reached, which includes the shaky, struggling, poor establishments. Those whose knowledge and experience in such matters is very great could so classify all traders. Now, it must be evident that when the chaos which follows a violent commercial revulsion begins to be transformed into order, the business which the withdrawal of confidence is sure to throw as much as possible upon the centre or nucleus of firms which are comparatively unaffected by any revulsion, will commence gradually to work outwards again, overflowing ring after ring of the supposed lines which we suggest as defining the degrees of stability. This ebb and flow of the tide of credit, so to speak, is the result of competition, and of the fluctuations in commercial affairs, and must always recur with greater or less force and rapidity. It is an automatic working of the laws of commercial affairs which characterizes all markets. As the nature of a large proportion of mercantile business must partake more and more of the speculative character to keep pace with the keener competition of greater capitals employed by a larger number of first-class firms, so must the machinery requisite for each individual firm under the altered circumstances through which prices are affected in all markets become more elaborate. If this view be correct it would seem to follow that the important business of the world must be more and more settling itself into the hands of large capitalists; and that although new houses in all departments of trade will always be starting in proportion to the aggregate growth of the commerce of the world, the large and strong firms will increase in a greater ratio, and the number of the small ones will tend to diminish.

Before the invention of the telegraph, a house of straw could paint up its name, make a show with a few thousand pounds, and enter into very large commitments for good or for bad, as it might turn out. Shipments to a large extent could be made, and if all turned out well, a house might thus, by a stroke of luck, be established to occupy, perhaps, an eminent position. On the other hand, if the first operations resulted in ruin, it was worth the risk, and a fresh start was made probably somewhere else under a new title. Such instances being multiplied in all the great commercial centres, it is easy to understand how markets could be glutted, prices raised to a fictitious level, and all the links forged into the chain which snaps at once, when the tension upon credit has gone beyond a certain point. Matters however are changed in this respect, and are changing from day to day. So small is the expense of obtaining information, compared with the risk of signing a contract with a house of straw, or of doubtful respectability, that the electric wire serves accurately enough for the purpose of ascertaining the position of a new customer who may present himself at a large establishment to do business. A most salutary effect is thus in process of being worked out. The great thing in commercial affairs is to keep out the weak speculative element, and to drive them into subordinate positions to work their way up in a legitimate manner, to become principals. The means of obtaining information now is so considerable, that if a man signally fails, almost the only hope for him is to change his name. In some instances this has been done, and followed by astonishing success, although the way it was achieved would, perhaps, hardly bear close investigation.

So far, we have referred more particularly to the altered character of modern influences upon commercial markets, and we have done so because the changed conditions which affect the value of one commodity in the markets of the world more or less affect all; but, as we are specially writing with reference to Stock markets, we only propose to touch upon other markets in passing.

[Sidenote: THE EXTENSION OF LONG WIRE TELEGRAPHY.]

The net work of telegraphic communication, in Europe at least, is now, in the year 1874, so far complete that, when a pressure of business is felt by the sub-marine telegraphic companies, the complaints of delay are not frequent. The long wires are also multiplying rapidly. The progress that has been made in telegraphy was made known to many for the first time by the circumstances being published, that the Shah of Persia’s first minister at Teheran was aroused out of his sleep early one morning, during the visit of his royal master to England, to reply to a message which, to the minister’s astonishment, he discovered had a few minutes previously been dispatched by Dr. Siemens, an operator who had been expressly established for the use of the Shah in Buckingham Palace.

[Sidenote: MONEY FAMINES SHOULD HENCEFORTH BE AS IMPROBABLE OF OCCURRENCE AS CORN FAMINES.]

[Sidenote: ADVANTAGES DERIVED FROM OPENING UP COMMUNICATIONS WITH THE CORN-GROWING PROVINCES OF RUSSIA.]

We are of opinion that the complete communication that is now established between the commercial and monetary markets of Europe will tend gradually, if not rapidly, which is very probable, to diminish the effects of what we understand by commercial crises. The opinion embodied in this sentence which was written before the American financial crisis of 1873 broke out, has been corroborated by the great assistance afforded by the Atlantic cable in mitigating the immediate effects of the first symptoms upon the public mind, and in at once confining the disorder within limits which would probably have been impossible in the absence of telegraphic communication. The main reason why we have suffered from monetary panics so severely during the first three quarters of the present century has been from the absence of rapid communication with other monetary and commercial centres, as well as from the absence of large auxiliary monetary centres holding a good average supply of cash, to be lent out on good security to the highest bidder for the time. The facilities which now exist for applying the over-plus of grain at one centre of population to satisfy the deficiency at another, has done away with famines. The late exception of Persia proves the rule. Corn is a commodity, and money is a commodity. What applies to one, as regards demand and supply, applies also to the other. A strange nervousness still exists in some quarters about the amount of the Bank reserve, fears being entertained that it will be found too small when the time of pressure comes. Persons who are so loud in their protests at reductions in the Bank rate can never have been buyers of money themselves, or, in other words, sellers of bills. To keep the value of money the smallest fraction above what is actually necessary at the time, by the capricious exercise of a brief authority, is to commit an act of unwarrantable injustice, and to rob the needy. We say if the Bank directors maintain a higher rate of discount than is necessary, they rob the needy, and compel holders of bills to pay an illegitimately high rate of discount. It is urged in defence of this nervousness, that the attractive power of a higher rate is slow, and that the till may be exhausted before the required supply arrives. As and when it may be necessary the Bank should raise or lower its rate, maintaining a reserve which is sufficient at all times if it be about one-third of the liabilities. To speculate upon the future, is to attempt to discount influences which may never be felt. To maintain for a day a higher rate than is necessary, is to tax the public for private ends, to reinstate Protection, and to disregard sound economic principles. To illustrate what we mean, take the case of bread famines. Almost the only nation that has suffered from the worst kind of bread famine of late years, has been one altogether outside the pale of civilization. At the period referred to, the telegraph was only seen in Persia, because it was necessary to use the territory for putting up telegraph-poles to carry a through wire to India. As we write, there is not a steam-whistle to be heard in that country, which is somewhat astonishing, considering that it is so near to us and that it is twice as big as France; although it must be said, in justice to His Majesty the Shah, that he has already seen the benefits to be derived from coming out of his dominions himself, and by letting civilizers in, with _carte blanche_ powers, to transform his dominions from a condition, as regards production, which may well shame the representative of an ancient line of kings. With the exception of countries situated as Persia is, with reference to obtaining supplies from other nations, no considerable centre of population need suffer from bread famine in our time, unless under circumstances which no human foresight can prevent. This very important fact was recognized when the first great foreign railway loans were offered for subscription in England. It was seen that by enabling Russia to make railways from the great corn-growing districts of her Baltic provinces to ports to which vessels could gain access during the winter, we should, in case of need, be able to supply ourselves from this source. We have not yet had special occasion to prove the inestimable value of those lines of railway, but one thing is quite certain that, whatever some authorities may say as to the impolicy of lending largely to foreign powers to assist them in constructing strategic railways, for reasons beyond the one given, England never made a better business than by lending Russia some of her surplus capital. Whether or not we have now lent sufficient is another matter.

A hunger crisis arises from a scarcity of bread, and a monetary crisis from a scarcity of money, or what represents it perhaps too largely at some centres, credit. There are stores of corn kept in larger or smaller quantities by all civilized nations, and famines have arisen in former times, not only from the absence of sufficiently rapid communication making the surplus supply of one centre available for the deficiency of another, but from the failure of production. It is tolerably certain, however, that at all times while human beings have existed there has always been enough food grown for every living creature, if it could have been distributed according to the varying wants of different populations. Now that this can be effectually done, famines are unknown except in lands whose people are such lie-a-bed tories that they prefer to sit in the sackcloth and ashes of barbarism and want, to humanising the body and soul by the regenerating influence of modern civilization.

Money is as much a necessity as bread in the world. Indeed, it is of more; for bread alone carries a man a very little way, according to modern notions, whereas money is the lever that lifts every obstacle from the path. It would seem quite reasonable, therefore, to infer that when the same means have been established for making the surplus at one monetary centre available to supply the deficiency at another, with the rapidity which is proportioned to the more sudden pecuniary requirements that are developed than is the case with corn, the very serious and prolonged disturbances which have been experienced in the past from such a cause would gradually be prevented in the future.

[Sidenote: THE GROWTH OF WEALTHY MONETARY CENTRES.]

Apart from the single question of rapid telegraphic communication, there is another matter deserving of as much consideration, which is the increase in the number of large monetary and commercial centres. Of late years the growth of wealthy centres has been rapid, and the reservoirs of unemployed money have thus been increased so that a deficiency at one could be supplied from another at a price. Diseases of the body break out here and there in the world at different periods, and other centres of population get warning, and by quarantine and strict sanitary measures, its spread, as in the case of cholera, is checked. Speculation is a disease of the mind, and like diseases of the body which arise from indulgence, carelessness, and neglect, it in the same way comes to a crisis at places where greed of money, folly, and commercial debauchery hurry people into extravagances and luxury that are sure to result in a general eruption. The growing wealth of continental states is an important feature in the altering character of Europe, from a financial point of view, as we near the last quarter of the nineteenth century. As monetary centres, both Berlin and Vienna have been taking a much more prominent part since the Franco-German war than there was any prospect of their doing before the transfer of so much wealth to Germany by the war indemnity payments. At the same time, London has risen higher, and to a level of still greater importance even than she had occupied before as a trade centre. In proportion as other such centres are growing in influence with their reserves of floating capital and credit is London shored-up, so to speak, against the violence of a commercial crisis by the growth of subsidiary monetary centres, which form the second line of defence. Such a second line of defence against a sudden collapse of credit, such as we have experienced several times during this century, is of the utmost importance to a centre like London, where the existence of an elaborate system of book-credits causes such an economy of the currency.

[Sidenote: PRIVATE CIPHER TELEGRAMS AS EXTERIOR INFLUENCES UPON PRIORS.]

Among exterior modern influences is the rapidity with which the large professional speculators obtain cipher telegrams, informing them of important events that transpire abroad which are calculated to influence prices in all markets. The effect of the rapidity with which such events are thus made known is that, whatever influence they may be calculated to exercise upon certain values, it will almost always have been discounted before the ordinary haphazard speculator gets to know anything about it. Close observers will be able to confirm this by having remarked that all political information is, as a rule, known sooner at the Stock Exchange than anywhere else.[32] So it is with all news that is likely to affect prices that are quoted in the public prints. Many a man has gone quietly up to the city some morning after studying his newspaper telegrams and bought or sold some stock on speculation, under the impression he was stealing into the enemy’s camp while the foe was asleep. On looking closer into the matter—of course when it is too late—he discovers that the information he has been so cunningly operating upon is already, for many hours, perhaps half a day, a matter of history.

[Sidenote: THE ALTERED CHARACTER OF INTERIOR INFLUENCES UPON PRICES.]

[Sidenote: THE CREATION OF SECURITIES TO MEET THE DEMAND.]

[Sidenote: GETTING BEHIND THE SCENES.]

[Sidenote: THE DIFFICULTY OF “CUTTING” A LOSS.]

What is the altered character of the interior influences? One, and perhaps the most, important, is, that syndicates of powerful speculators act in conjunction with the dealers in the markets. There are distinct markets for certain stocks and certain classes of stocks, and the jobbers confine themselves more or less to dealing in a few descriptions. In a wealthy community there will probably always be a large number who cannot control a restless desire to be operating in the markets, who must now and again try their hands at speculation, as circumstances seem to present favourable opportunities. There are periods in the prosperity of every community when individuals are known to have made profits in their business, and in the natural course of things seek investments for their gains. Securities at such times are created on a great scale to suit the taste and appetite of the public. In the first stages of the creation of new securities considerable profits are made by _bona fide_ investors, which in course of time attracts the attention of speculators without means, who think that they have but to venture and they also will gain. After a time inflation sets in; and we may here ask the speculator if it ever occurs to his mind that understandings exist between the syndicates of professional speculators and the dealers, whereby the former get to know to what extent the public have bought by seeing the jobbers’ books? It is easy to see the power a syndicate with large means may exercise by such a system as this, even in a large market, supposing they could get to see the books only of the larger jobbers. We will suppose, for instance, the public can be induced to buy a certain stock largely on some fictitious information. If, at the close of each of three or four days buying for the rise, it was ascertained by an examination of the jobbers’ books that accounts were open in a stock to the extent of half a-million of money by over a hundred different purchasers, it becomes evident that there is a tree of ripe fruit grown as it were by magic, and the syndicate has nothing to do but to pluck it. Out of a hundred buyers at least a third would probably rush out and take their loss at the first indication of their being on the wrong scent. One of the great faults which characterises all speculators, with very few exceptions, is that they cannot summon courage to “cut a loss” at once. The object of buying was to gain, and the mind is associated with a profit in connection with a rise on the transaction, and it is very difficult to change about, and gain, in a negative sense, by not losing more. It is upon this weakness of speculators individually, in not being able to “cut a loss,” that bands of marble-hearted riggers lure the public into holes, and squeeze their purses before they let them out. With such tenacity do speculators hold on to a stock, hoping for a recovery when they have made a loss, that they will leave it as a man drops into the sea from a burning ship, only when he is singed by the flames. Many speculators on discovering they are on the wrong tack gather themselves up _pour mieux sauter_, and turn round and sell for the fall, believing they shall be quick enough to catch it and swim with the downward stream before it is spent. In the greater number of cases, such speculators watch the fall far enough to be sure they are right in their view of the way the price is going, and then they “get in.” What is the usual result? Hesitation in the second operation has caused them to miss the mark, and the account is closed with a loss on both transactions; the speculator having bought at or near the top, and sold at or near the bottom.